2 value stocks to consider buying before the new year

Market conditions could favour value stocks in 2024, suggests Roland Head. He highlights two UK companies he thinks could be too cheap at current levels.

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The recent market bounce has provided a welcome boost for hard-pressed investors. But in my view, many UK shares still look cheap. Here are three value stocks on my radar as possible buys for 2024.

Essential supplies

Anyone who did online shopping in the run-up to Christmas had a good chance that some of the packaging they received was produced by FTSE 100 firm DS Smith (LSE: SMDS).

This £4bn business supplies a lot of packaging for food producers and industrial customers, as well as consumer goods.

A slowdown in demand has led to a period of destocking, with DS Smith’s customers reducing the amount of packaging in their storerooms. Profits are down and the shares have been hammered. But I think we may have reached a turning point.

DS Smith’s recent half-year results show pre-tax profit down by 15% to £268m. However, this result was expected and CEO Miles Roberts believes the group’s full-year results will hit City forecasts.

Cost-cutting means that the company’s profit margins actually improved slightly to 10.4%, despite lower sales.

Looking ahead to 2024/25, profits are expected to start climbing again. Of course, there’s still a risk we’ll see a renewed consumer spending slump in 2024. That could delay DS Smith’s recovery, but I don’t see it as a major concern given the company’s current modest valuation.

DS Smith shares currently trade on about nine times forecast earnings, below their historic average of about 14 times earnings. The stock also supports a 5.8% dividend yield, which should still be covered 1.9 times by profits this year.

I reckon a fair amount of bad news is already priced into DS Smith shares. I think the shares look good value and could perform well from this level.

Pumping out value

North Sea oil and gas group Serica Energy (LSE: SQZ) isn’t the kind of stock I normally look at for value. But shares in this £850m firm currently trade on just three times forecast earnings and offer a stonking 10% dividend yield. What’s going on?

In my view, the market is rightly cautious about bidding up energy stocks to high valuations.

Oil and gas prices are prone to boom and bust cycles and Serica’s profits are directly linked to these commodity prices.

Looking further ahead, the energy transition means that long-term demand for fossil fuels is expected to fall.

On the other hand, Serica’s recent profits have been supported by very strong cash generation. The company’s 10% dividend yield looks affordable to me, especially as the most recent accounts showed a net cash balance.

Serica’s acquisition of Tailwind Energy earlier in 2023 also means its production is now much more evenly split between oil and gas. That reduces its exposure to volatile UK gas prices.

The Tailwind deal has also opened up some new drilling opportunities for the year ahead, which are expected to result in quick production gains.

I’m generally cautious about investing in fossil fuel producers these days. However, I think that Serica is a well-run business that’s affordably valued. On balance, I think the shares are probably too cheap at current levels and could deliver attractive returns in 2024.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended DS Smith. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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